Starbucked Page 13
But obviously, the system was much more sophisticated than a few rules of thumb. Before Starbucks considered building in a particular spot, it weighed the area’s average education level (better-educated people were more inclined to patronize Starbucks), average house-hold size, average income, the number of cars that pass within an eighth of a mile, the daytime versus nighttime population, and scores of other statistics. In keeping with the McDonald’s maxim, Starbucks made itself into an unavoidable obstacle in people’s daily paths, instead of trying to draw them out of their normal routines. The goal was to end up with the highest-visibility location possible — to “shout the name out” to passersby, as Rubinfeld explains it. They called the ideal site for a store “the corner of Main and Main,” and indeed, Starbucks is fanatical about corner locations. “We put in place a very efficient real estate machine that has targeted intersections in every major market across the country,” Rubinfeld told me, continuing with the “machine” motif. “People are working those intersections constantly, just waiting for a lease to come to term.”
The operative word there is every, because the overarching objective of the company’s real estate apparatus was to be everywhere in every city as quickly as possible. Starbucks didn’t dip its foot gingerly into the water to test a city’s reaction; it flooded new markets with stores, suffocating any major competitors under the deluge. Starbucks strikes quickly and decisively, a fact stand-up comedians apparently feel they must comment on at least once a month. (For example, former late-night talk show host Craig Kilborn: “There’s a new Starbucks game out. I bought the game and played it. Then I woke up this morning and there were six more games.”) The company could whip out a store in six weeks and, because of exhaustive preplanning, reach its maximum sales volume almost immediately. Starbucks was extraordinarily adaptable, able to cram its modular design components into the smallest retail spaces. Who could possibly keep up?
The company often orchestrated store openings specifically to terrify anyone who would dare challenge it. “Starbucks didn’t just open in a town — they’d scare the daylights out of you,” said Don Schoenholt, the specialty-coffee guru. “It was like, boom! ‘We’re here, baby!’ ” Case in point: in January 1996, Starbucks ensured that its entrance into the Toronto market wouldn’t go unnoticed by opening its first five stores on the same day, then another five on the same day the following month. When I asked Rubinfeld about this show of brute force, he made no attempt to deny that the move had little to do with satisfying customers and everything to do with frightening competitors. “Of course that’s why we did it,” he said. “You understand the personalities behind this, right? Toronto’s a city of millions of people. So what are you going to say? ‘Let’s go open stores there. Oookay, how about here first?’ No. That’s mediocrity. What you want to do if you’ve got a major competitor in the marketplace there is find out how you can break through the noise. How can you make a statement?”
Besides, Starbucks didn’t need to worry about overbuilding, because its growth strategy across North America was as systematically thought out as a military campaign. This, too, followed a plan: the “hub” and “spoke” expansion model. First, the real estate department put together a database ranking every U.S. metropolitan area according to the qualities Starbucks found especially desirable — high income, high population, and high education. San Francisco headed the list; apparently, Saco, Montana, was at the bottom. With typical Starbucksian cuteness, they categorized these metro areas into tiers: “grande” markets, which could bear twenty-five-plus stores; “tall” markets, which could handle ten to twenty-five; and “short” ones, of less than ten. Then Starbucks just went down the list. The company began its campaign in each market by building a costly flagship store in the middle of the city’s most thriving district. This central urban area was the “hub.” Starbucks peppered each “hub” with stores at a predetermined rate — at least ten per year in a “grande” market — until it reached the point where analysis showed it could make more money from building a new store in a suburb. Now came the “spokes” with which the company surrounded the established “hub,” essentially walling off its turf.
Before Starbucks entered any new neighborhood or town, it would supplement its statistical rundown with a few tricks of the trade. Real estate employees checking out a potential site would peek in the windows of nearby dry cleaners, to make sure the clothes looked like they belonged to affluent professionals. They examined where the oil stains were in parking lots, to see where people actually shopped. They even checked the ethnic foods aisles in the supermarkets, trying to find out if the locals were up for culinary experimentation. * If everything checked out, Starbucks loosed another volley of stores — and the barrage only gains in intensity with time. In 2006, for instance, Starbucks declared that it would build 250 new outlets in Chicago by 2011, which would give the city an astonishing 580 stores; the company refers to this supersaturation tactic as “infill.” By showering a major market with outlets all at once before moving on to the next region, Starbucks both capitalized on economies of scale and guaranteed its dominance over the area, forcing competitors to try to establish beachheads in lower-tier cities. So it went, all across America: blanket the “hub”; construct dozens of “spokes”; move on to the next battlefield.
The one exception to the “hub” and “spoke” strategy was New York City, a territory that was dear to both Schultz and Rubinfeld. (The two first met while living in the same Manhattan apartment building back when Schultz was still a house-wares salesman.) In 1994, Starbucks announced it was making its much-anticipated foray into “New York,” sending competitors into a rush to open expensive stores in the heart of the city and carve out their piece of the market. But Starbucks was toying with them. Instead of planting stores in the “hub,” the company first built “spokes” in Westchester and Fairfield counties, where many rich and influential New Yorkers lived. As the competitors in Manhattan struggled to keep their hastily assembled stores afloat, Starbucks sat back and let the anticipation for its arrival escalate. Finally, it opened truly monolithic Manhattan stores — like the cavernous four-thousand-square-foot Astor Place Starbucks — and overstaffed them to cater to demanding New Yorkers. The competition jumped ship, and now Starbucks is all you see. “That was a brilliant strategy,” Rubinfeld said with a grin. “It was a total mindfuck. You can put that in your book.”
After scattering its coffee-houses throughout a city long enough, Starbucks would soon run out of locations for new stores that wouldn’t draw customers away from existing ones. Cannibalization, as it’s called, was inevitable: if Starbucks wanted to continue “infilling” a market, it essentially had to steal customers from itself, thereby risking lower sales. For Starbucks, this wasn’t much of a dilemma. The company would rather subtract from its own sales than let a competitor come in — and besides, Schultz had never been queasy about putting his stores across the street from each other. * But strangely enough, whenever the company cut into the clientele of one of its own stores, any loss in sales was temporary; new customers would take the place of the old ones within months, and both stores would soon be going full tilt. Each new store just created new demand. When I asked Dave Olsen, the Starbucks coffee expert, why there seemed to be no breaking point for this, he pointed out that most people drink coffee every day, making virtually everyone in an area a potential regular. “We’re looking at the number of customers, not the number of stores,” he said.
The only significant issue was making sure people noticed that the new stores existed. Sometimes this was easy. For example, when Starbucks entered Harrisburg, Pennsylvania, in 2004, the grand opening attracted four local television crews and a hundred spectators. But failing free exposure like that, Starbucks had a clever stratagem for publicizing its new outlets on the cheap: get others to do it for you. John Moore, a former Starbucks marketing department employee, explained that Starbucks “had this down to a science.” Each store opened with its ow
n miniature marketing campaign, which was usually tied to a local charity. Allying with a charity was more than just public relations; it also earned the company access to huge networks of people. Starbucks typically designated a day when a portion of the new café’s sales would go to the charity, giving the nonprofit an incentive to do much of the marketing legwork itself. “What it’s all about is word of mouth,” Moore said. “If a store donates a percentage of sales to a charity for a day, that charity will want as much money as possible, so they’ll go out and tell as many people as possible to go out and buy a latte.” Scott Bedbury, the former marketing chief, told me that another favorite method for attracting notice was to build a store in a children’s hospital. “Call it marketing; call it PR,” he said.
Put these pieces together, from the right-hand turns to the hubs and spokes, and you can see why Rubinfeld insists on calling Starbucks a machine: the company expands on a huge scale with unpre-ce-dented efficiency. This store-building prowess sometimes produces amusing results. In 2003, Starbucks constructed a store in the community of Casa de Oro, just outside San Diego, which the company publicized with banners and a daily countdown as “San Diego County’s 100th Starbucks.” But this ended up being for naught; it was actually number 101. As the San Diego Union-Tribune reported the day after the store’s debut, “A Starbucks in the Midway area that also opened yesterday beat it by nine minutes when it opened at 5:07 a.m.” Oops. Another issue came up when customers dared to name a store their “favorite Starbucks,” only to find that the company had built another one even nearer to their home or workplace. This put the customer in an awkward position, the Washington Post writer Joel Achenbach observed: “Should you switch? Or show loyalty to the original? Or is the whole point that they’re fundamentally the same?” Starbucks actually has a solution to this quandary — go to the one that triggers fewer flashbacks. A company executive once explained that if a store’s color scheme “reminds you of something from your childhood that you intensely dislike, you can go three stores down to a different Starbucks and say, ‘I like this better. I just feel better here.’ ”
That people can say things like this without being considered deranged is just one of the strange symptoms of Starbucks’s ubiquity. Some effects are more serious, however. According to U.S. Department of Transportation data, the number of short stops made by morning car commuters (say, for a latte) went up nearly 400 percent between 1995 and 2001, leading to greater fuel waste, higher pollution, and worsened gridlock as more drivers pulled on and off the road. Somewhat predictably, the travel analyst Nancy McGuckin dubbed this traffic-snarling phenomenon the “Starbucks Effect.” The company has even been known to inspire flagrant criminal activity in its customers. In 2002, a reporter for the local newspaper in Chagrin Falls, Ohio, spent three full weeks staking out the town’s Starbucks in order to report that an average of thirty-six people jaywalked across busy North Main Street every morning to get to the café.
If some Americans feel unsettled at seeing Starbucks wherever they look, company executives are steadfastly unapologetic — remember, the stores are supposedly there to make our lives easier. When I asked Rubinfeld if this justification for the company’s omnipresence was perhaps overly simplistic, he replied, “Coffee has always been about convenience. It has to be easy to get in and get out. So why is this new to you? Why is that surprising?” It seems likely that people would grow to resent the audacity and invasiveness of it all, I said, especially since it’s the company’s goal to become inescapable. “Well, initially there was a big, audacious issue to it,” Rubinfeld said. “But it’s a convenience-driven product, so people said, ‘They’re serving me better, and I care all about me.’ Whether you know it or not, Starbucks is offering you convenience.”
One Goliath, Many Frustrated Davids
Success is a relative concept when you’re competing against Starbucks, but of all the chains that attempt to joust with the company, Caribou Coffee has so far been the most successful of the lot. It holds the unique distinction of being the only coffee chain with more stores than Starbucks in a major market — Minneapolis, Caribou’s home turf, where it maintains a slight edge of a few dozen outposts. Caribou is also the only coffee company that boasts a leader who founded and sold a lucrative cookie company, set a number of long-distance bicycling rec-ords, and ran strong but unsuccessful political campaigns to unseat both an incumbent senator (Georgia Republican Paul Coverdell, in 1998) and a sitting Speaker of the House (Newt Gingrich, in 1996). “It’s funny,” Caribou CEO Michael Coles said, “when I raced bicycles, my nickname was ‘Caffeine Coles.’ It didn’t have anything to do with coffee, though — it was because I was so high energy. So I like to think I was destined to be in the coffee business.”
Coles found himself drawn to his current field largely because of one of the coffee-house industry’s strangest quirks: there is no real runner-up to Starbucks. Given the craze for espresso that took off in the nineties, one would expect that someone else had made money off of the new national thirst, but Starbucks had completely dwarfed every challenger. When Coles started looking for a new calling after he sold his first business, the Great American Cookie Company, for a small fortune (“God bless the mall,” he said), he was astounded at the yawning gulf between Starbucks and everyone else. “I looked at how big Starbucks was at the time, but I couldn’t find out who was the second-biggest coffee company. After some digging I found out that the second-biggest was Caribou, and I just couldn’t believe it — it was second-biggest with about 150 stores. I kept Googling it because I couldn’t even believe it. I thought, here was an opportunity.”
By some measures, Caribou has cashed in on this opportunity; the company now operates about 450 stores — up from 180 when Coles took over in 2003 — and it completed its initial public offering on the Nasdaq exchange in 2005. With its trivia challenges at the cash register, its unpretentious and kid-friendly atmosphere, and its mountain lodge design — complete with crackling fireplace — Caribou has thrived as a sort of anti-Starbucks.
But despite its modest success, Caribou also epitomizes the struggles every coffee-house chain has faced in trying to hold on to a slice of the market. For one, it has long had problems at the top — the company has endured several management shake-ups, and its stock nose-dived soon after the IPO. Caribou has had a healthy dose of bad luck, as well. In 2000, the company’s founders, John and Kim Puckett, sold their ownership stake to the investment fund Crescent Capital, an arm of the First Islamic Investment Bank of Bahrain. For obvious reasons, this connection became problematic after September 11, 2001. By the next summer, the inevitable rumor that Caribou funded terrorism started making the rounds on the Internet. Sales plummeted; it got so bad that Caribou had to shutter its Chicago operations completely. Of course, First Islamic (which swiftly changed its name to the comfortingly vague Arcapita) wasn’t supporting terrorism at all, but it did require its businesses to obey some of the tenets of Shar’ia, or Islamic Law, which punishes theft with amputation, condemns homosexuals to death, and may or may not encourage routine wife beating. (Caribou only had to abide by the financial rules of Shar’ia — like its prohibition against collecting interest — but being linked to the other, more controversial parts doesn’t make for great public relations.) In many ways, Caribou’s plight exemplifies why there is no number two to Starbucks, not even an Apple to its Microsoft. Through mismanagement, carelessness, or plain ill fortune, every single challenger has faltered. * And with those that didn’t, Starbucks got ruthless.
As an example of carelessness, consider Starbucks’s institutional competition: huge coffee brands like Nescafé and Folgers. For decades, the specialty-coffee industry braced itself for the seemingly imminent thud of one of these eight-hundred-pound gorillas landing on the coffee-house scene, crushing all comers underneath the gigantic bankroll of Procter and Gamble or Philip Morris (which own Folgers and Maxwell House, respectively). But the major brands never even tried; they just ran new variati
ons on the old commercials. For instance, in a 2001 spot for Folgers powdered “Caffe Latte mixes” that ran frequently on MTV, three hip twentysomethings sit on a couch sipping coffee, looking bored. In chimes a voice from above: “This isn’t one of those coffees you sit and sip as the world passes you by.” Thus inspired, the youths tear the cushions off the couch and ride them down a snow-covered hill. Apparently the kids are into proper sofa maintenance these days, because no one bought it.
The entire point of the gourmet coffee movement escaped the fast-food giants as well. If anyone could have matched Starbucks in a contest of store-building skill, it was McDonald’s, but the way McDonald’s took its shot at the coffee-house market makes one think that the company wanted to fail. Consumers associated coffee-houses with sophistication and community, yet McDonald’s dubbed its concept “McCafé,” pretending it had no idea that, to most Americans, nothing said “cheap, plastic, and tacky” like slapping the prefix Mc- in front of a word. Though McCafés have seen success in Europe and Australia, they are basically just dressed-up McDonald’s outlets. “They went as far as fake lace curtains and some kind of veneer wood on the front counter, as if that would vault them into Starbucks’s league of design,” scoffed Rubinfeld. Meanwhile, Starbucks was decimating McDonald’s coffee sales, taking them down by a third over the last decade.